“Over the past couple years, millions of Americans have reneged on their debts — because they lost their jobs, because they took on more than they could handle, or both. For many, those defaults have brought immediate financial relief, leaving more cash to spend on other things. Now, though, they’ll also have to face the challenge of living with bad credit.
As of April, 25% of Americans had fallen into the least-creditworthy category, garnering a rating of less than 600 from FICO, the main arbiter of consumer credit in the U.S. That compares to only 15% before the recession, according to data compiled by Deutsche Bank.”
Why does this matter? Now that NINJA loans are verbotten, this pretty much means that “one in four Americans won’t be able to borrow money to make a major purchase in the foreseeable future.”
Before the recession, the number of people with a FICO score of less than 600 was under 15%.
Some people will lament this, but it has a silver lining. Deleveraging is certainly a good thing, and forcing consumers off of the credit treadmill may actually help these folks over the long haul. The repercussions of the credit weakening means softer growth as the broader economy moves to a more sustainable basis of spending.
Some people complain that unemployment insurance makes people lazy; I disagree — at least so long as their are 5 or 6 unemployed people for each job opening.
But I am going to posture that easy credit allowed some people borrow to maintain a lifestyle, rather than earning to maintain a lifestyle.
I wonder: Will the lack of credit spark a revival of creativity and industriousness amongst those that want to maintain their spending habits? Asked another way, could bad credit spark more economic activity?
Number of the Week: Default Repercussions
Real Time Economics, JULY 31, 2010